What is a Cap Rate?

What is a Cap Rate?

The capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor's potential return on their investment in the real estate market.  Cap rate is most useful as a comparison of relative value of similar real estate investments.

Example: Capitalization Rate = Net Operating Income / Current Market Value

Property current market value = $300,000.  

Rent is $2,700 per month x 12 = $32,400 annually

Annual Operating expenses = $7,800 

$32,400 (annual rent) - $7,800 (annual expenses) = $24,600 Net Operating Income (NOI)

$24,600 (NOI)  / $300,000 (property value) = .082 x 100 = 8.2% Cap Rate

Note: Net Operating Income equals all revenue from the property minus all reasonably necessary operating expenses. NOI does not include taxes, principle, interest, depreciation or capital expenditures.

    • Related Articles

    • Texas State ExpressOffers Procedures

      Situation 1:  Do you have this property already under a Listing Agreement? YES: STOP. Reach out to your Managing Broker. All ExpressOffers MUST represent the iBuyer, Intermediary may not be used. Listing Agreement will need to be terminated. NO: ...
    • Colorado ExpressOffers Procedures

      Jes and I created a video to explain why we have to do the procedure this way. Watch it here. Situation 1: You found an off market property that would be a candidate for the ExpressOffers program: Check to ensure the property completely fits a Buy ...
    • Louisiana ExpressOffers Procedures

      When you do a listing presentation with a seller and believe the house might be a prospect for an iBuyer, you will complete a normal listing agreement with the seller along with all documents required. You will then write an addendum to the listing ...
    • Can I submit a HUD foreclosure to ExpressOffers?

      Yes, however, when looking at HUD deals, pay attention to the offer restrictions of the other listing or on the HUD foreclosure website.  Typically, the first 7 to 21 days are reserved for owner occupied offers ONLY. Investor offers will only be ...
    • What is ExpressOffers?

      ExpressOffers What is it? ExpressOffers is our proprietary iBuying software platform that connects eXp Agents to our marketplace of Institutional Investors (iBuyers). You identify properties for the investors using their Buy Box criteria and receive ...